Narayana Murthy warns against IPO valuations above P/E of 20-25

Narayana Murthy has expressed concerns over India’s booming IPO market, particularly the high price-to-earnings (P/E) ratios. He believes valuations above 20-25 are speculative. “I don’t understand high P/E businesses,” said the Infosys co-founder. Murthy is accustomed to P/E ratios between 7 and 15, occasionally reaching 20-25 in exceptional cases. Anything higher, he warns, carries significant risk.

Murthy advises startups cashing in on IPOs to focus on prudent spending, cost control, and growth. He emphasizes that sustainable market expansion and revenue growth should take precedence over excessive expenditure.

India’s IPO market has surged in 2023, raising ₹1.19 lakh crore ($14 billion), surpassing the previous record set in 2021. The country ranks second globally in IPO fundraising, trailing only the US ($26.3 billion) and ahead of China ($10.7 billion). This growth is driven by strong demand and liquidity, with both domestic and foreign investors increasingly flocking to India’s primary market.

Noteworthy IPOs, including Swiggy’s ₹11,300 crore listing and ACME Solar’s ₹2,900 crore offering, show the robust appetite for shares. These IPOs were heavily oversubscribed, and demand remains strong. Kotak Investment Banking’s V Jayasankar notes that foreign investors continue to be active in India’s primary market despite their pullback in secondary markets.

Top IPOs this year include Hyundai Motors at ₹27,870 crore and Life Insurance Corporation of India at ₹21,008 crore. Hyundai’s offering was particularly notable, attracting significant participation even amid market volatility.

Investors have seen strong returns, with 49 of the 68 companies listed this year trading above their offer price. Some have even doubled since their debut. Investment banker Ravi Sardana attributes the strong returns to increased investor confidence, which is expected to fuel further IPO momentum.

Retail investor participation has also risen sharply, with demat accounts in India reaching 179 million in October, up 35 million from earlier in the year. This surge indicates growing interest from both retail and high-net-worth investors.

Despite the excitement, Murthy’s cautious stance on spending and valuations offers a timely reminder to focus on long-term market fundamentals.